Legal Land Issues: Financial Privacy When Buying Land, Fair Market Value and Bundle of Rights

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I am a real estate broker who deals exclusively with country land. There are just about as many questions regarding land ownership as there are landowners, and knowing what to do about a given situation can be difficult to determine.

A veteran real-estate expert smoothes the wrinkles of land ownership in the Rural Real Estate column. This issue includes information on maintaining financial privacy when buying land, fair market values and bundle of rights.

Q. We are looking for land, and when talking to real estate agents the first thing they ask is about our personal financial picture. We feel this is nobody’s business and find this practice very offensive. How can we avoid this happening in the future?

A. You probably can’t maintain complete financial privacy when buying land unless you have the ability to pay all cash for your land. A real estate agent is not being nosy but doing a good job when delving into your financial affairs. This is called “qualifying the buyer,” and if you’re serious about making a real estate purchase you must go through the process. When qualifying you, the agent needs to know your available cash on hand or at least how much you will make available for a down payment. Your current earnings, future income expectations, and stability all will point to whether you can sustain a payment schedule over the years. Also, the status of your credit is important as a seller may run a credit check on you when you make an offer to buy. Only after obtaining this information can the agent match you up with the right properties, ones that you can afford. It is inappropriate and a waste of time to show you properties that are less than you want or are far over your heads in price.

Although many people are uncomfortable sharing their financial information with strangers, remember: The real estate agent is a professional and won’t divulge your private business to others. With this exception: When you make an offer to buy property the agent will tell the seller enough about you to make the seller comfortable with your offer. This breach of privacy is necessary. After all, the seller is taking a risk by selling to you on a contract.

If you plan on buying with all cash you simply need to let the agent know how much you are prepared to spend.

Q. We want to sell our small farm. My husband wants to price the place higher than its actual value to leave room for negotiation, but I think we should price the place at exactly the price we want. Which course of action do you recommend?

A. Anytime you set the price higher than 5 percent above the property’s fair market value you are asking for trouble. Studies have shown that a well-priced property will sell quickly but an overpriced property will stay on the market for an inordinately long period of time without ever even receiving a low offer. After a correct price adjustment is made the property usually takes some time to sell because by then it is “shop worn” and most potential buyers have crossed it off their list. Once this happens a buyer will almost never reconsider a property.

If a property sells quickly the seller inevitably feels it was underpriced. In actuality, if proper homework was done and the real estate was priced correctly a quick sale is the normal course of events.

Q. We are looking for land and recently toured several pieces all in one day. When we got home we found we had really confused the different parcels in our minds and weren’t sure which was which. Can you give us any ideas on how to keep this from happening again? We need an organized system for comparing the various properties we see.

A. You are not alone. This happens to almost everyone who looks at more than one piece of property in one day. The easiest way to handle this problem is by using field notes and a plus-minus chart.

When you arrive at a piece of property start taking notes immediately. Begin with an easily identifiable feature that you can use to name the place. List all features, both positive and negative, on your field notes. Does it have a view, trees, water? Is it level, steep, rolling? Are utilities available? Is it adaptable for livestock or other plans you may have? Be sure to note access and/or need for improvements, if any. Is there a wetland on the property?

Immediately after viewing land you should make a plus-minus chart while your memory is fresh. Create a chart for each piece of property viewed, and headline it with the easily identifiable feature you noted when at the property. Below the headline put a plus sign on one side of the sheet and a minus sign on the other side so there will be two columns on your page. On the plus side list everything you noted and can think of that you liked and every feature that makes the property useful to you. Under the minus column list the negative features to the property. If there are wetlands on the property they may well be listed in each column, as they are often beautiful and attract wildlife, but can severely limit your development and use options for that portion of the land.

There is no perfect piece of real estate, and your chart will always have some items in the minus column. By comparing charts you can graphically see which properties have the greatest number of positive features and least negative features. This will help you make an objective decision. Just be sure the minus column does not include a negative feature that can never be overcome or at least tolerated.

The plus-minus chart is a helpful tool for evaluating property even if you only view one piece of land. It helps organize your thoughts in order to arrive at an objective decision. One other way your notes and plus-minus chart are invaluable: It is a common tendency to mentally gather the best features from every piece of land you have seen and place them on one parcel. Your notes and charts will go far in preventing this impossible dream from occurring. Happy land hunting.

Q. My home and land are in a forested area. My neighbor recently told me that during a fire the local fire department can come inand cut down my trees without my permission. This makes me furious. Whatever happened to the rights of private property owners?

A. In many states the local fire department is charged with protecting property and has absolute authority to do so when a fire occurs. While most fire departments work with an owner whenever possible, they can take steps against the landowner’s wishes in order to protect property. These steps may include felling trees away from homes or other buildings and taking actions to keep the fire from spreading to adjacent properties.

Now that fire season is here it’s a good time to think of taking steps to protect your home and property. Try to keep brush a good distance from your home and outbuildings. Keep yard trees widely separated and away from structures. If possible, keep a green lawn or other nonflammable surface around your home. If you own forest land consider putting fire lanes through the timber and keep them free of brush. This provides access to the forest and creates fire breaks that can sometimes stop a fire. Check with your fire department on other steps you can take that are appropriate for your area.

Q. Several times lately I have heard references to the “bundle of rights” and don’t exactly know what that is. Could you explain it, please?

A. The bundle of rights you refer to is the property owners right to own, possess, use, enjoy, and sell, lease, or bequeath real property. These rights include all that is above and below ground level, including air space.

There are certain modifiers to these rights, however. Air traffic may pass over the property above a certain altitude and the property owner may not interfere. Other government restrictions can temper these rights, as in zoning, safety, and health laws.

Legend has it that when land was sold the previous owner gave the new owner a bundle of sticks that represented all of the rights to the property. Like the sticks, each right is considered a separate entity, and some rights can be sold, or a portion of them sold. For example, a percentage or all of the mineral rights or timber rights can be sold. That’s one of the main reasons a buyer should read the title report prior to purchase, to determine that he or she is receiving all the property’s important rights.

Water rights can be another matter. In some states they are deeded and will go with the land unless noted as exceptions on the title report. In other states they are not a recorded right. They are registered with the agency that oversees water-use rights. In that case you must check with that agency to make sure the water rights go with the property you are considering.

Naturally, the best real estate purchase is one that includes the full bundle of rights.

Q. I recently bought some land on a real estate contract. I have heard there is a way to shorten the payment schedule, say from 15 years to seven and a half years. Could you explain how to do this?

A. With pleasure. To cut the years on a real estate contract in half simply double the amount going to principal each time you make your payment. In the beginning this amount is small and relatively easy to do, but as time goes by the amount going to principal is constantly increasing and it takes careful planning to succeed. You will do fine if your income increases over the years.

For example, if you have a contract balance of $21,000 amortized over 15 years at the interest rate of 8%, your monthly payments are $200.69. Here is how to compute your extra payments: Multiply 21,000 by 8%, then divide the resulting figure by 12 (months). Subtract this figure from 200.69 to determine the extra principal payment you will make. $21,000 x 8% = 1,680 12 = $140. $200.69 – 140 = $60.69, the amount that will apply against the principal with your first monthly payment. Make your regular monthly payment and also send in the extra payment of $60.69. To compute the next month’s extra payment subtract $60.69 twice ($121.38) from your principal balance of $21,000 and use the same formula again. $21,000 – $121.38 = $20,878.62 x 8% = 1,670.29 = 12 = $139.19. $200.69 $139.19 = $61.50, send this amount along with your regular payment.

If you send in an extra payment equal to the amount going to the principal every month you will definitely cut your contract life almost in half and save thousands on interest payments. Another way to cut your contract life substantially is to make one extra full payment per year. This method also saves a great deal on interest over the life of the contract. With both methods be sure to state in writing that the extra amount is to apply against the principal. This works with mortgages, as well. Before you start this accelerated payment schedule be sure to verify there is no prepayment penalty for an early payoff.

Q. The seller accepted my offer for 80 acres based on a specific price per acre. This offer was subject to a survey, and it showed the property to be almost 90 acres. What do I do now?

A. If your offer was properly written you are not bound to go through with the sale, paying for extra acres at your price per acre agreement. Nor is the seller bound to sell 90 acres to you for the price of 80. If each of you still wants to go through with this it looks as if you have some negotiating to do. Be sure to put your agreement concerning the extra acres in writing.

Plus Column
Good access from county road (school bus route)
Level building sites
Good spring
Fair price, interest rate, and down payment
Beautiful rolling terrain

Minus Column
Easement through property to other land
1/2 mile from power
Raw land
No developments

Send your questions to “Country Real Estate,” MOTHER EARTH NEWS, Arden, NC. (State laws vary, and it’s important to remember that this column is no substitute for legal advice.)